Closing summary: Economists hope for US 'soft landing'
The consensus after the US jobs figures appears to be that the Federal Reserve will be much less likely to hike rates further after unemployment rose.
Higher unemployment suggests the world’s largest economy is slowing, and therefore might not need much higher interest rates to calm inflation. But economists are hopeful that the slowdown might stay at that.
Former White House economist Betsy Stevenson, now an academic at the University of Michigan, thinks the jobs data shows the Federal Reserve is on the right path to the fabled “soft landing”: cutting inflation without a painful recession.
A soft landing requires slowing, but not stalling the economy and that is the miracle that the Fed is achieving (knock on wood, still a ways to go ). https://t.co/GKBefun8ht
— Betsey Stevenson (@BetseyStevenson) September 1, 2023
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said:
Today’s US jobs report strengthens the case for the Federal Reserve putting a pause or even an end to its interest rates hiking campaign in the September meeting.
The report should be positively received by markets. The data suggests the US labour market is loosening but still in good shape, which supports the case of a “soft landing”.
In other business and economics news today:
The British defence company BAE Systems is setting up a local entity in Ukraine and has signed deals with its government to help ramp up its supply of weapons and equipment.
UK house prices fell 5.3% in August compared with the same month last year, the fastest annual drop in 14 years, according to Nationwide Building Society.
Superdry has swung to a near £150m loss and said it expected sluggish sales this year as the cost of living crisis hindered recovery plans at the struggling British fashion retailer.
The UK economy recovered to pre-pandemic levels in the fourth quarter of 2021, earlier than previously thought, the Office for National Statistics (ONS) has said after significant revisions to GDP data.
The UK’s manufacturing sector has slumped to its slowest activity since the depths of the coronavirus pandemic lockdowns, according to the purchasing managers’ index (PMI).
You can continue to follow our live coverage from around the world:
In the UK, the new school safety warning was prompted by a beam collapse at a building considered safe
In the US, two more Proud Boys face sentencing on US Capitol attack charges
In our coverage of the Russia-Ukraine war live, the Kremlin suggests any BAE Systems Ukraine factories would be a target for Russian military
And in sport, it’s transfer deadline day for the English Premier League: Liverpool reject £150m Salah bid, Spurs agree £45m Johnson deal
Thank you for reading the live blog this week as the summer drew to a close. Please do join the one and only Graeme Wearden on Monday for more. JJ
Updated
The hopes for an end to Federal Reserve interest rate rises – after a surprise rise in US unemployment – appear to have helped stocks on Wall Street.
Here are the opening snaps from the US stock markets:
S&P 500 UP 27.48 POINTS, OR 0.61%, AT 4,535.14
NASDAQ UP 96.80 POINTS, OR 0.69%, AT 14,131.76
DOW JONES UP 211.07 POINTS, OR 0.61 %, AT 34,932.98
The US jobs data suggests the Fed’s work on tightening interest rates is done, said James Knightley, chief international economist at ING, an investment bank.
He said:
The US August jobs report shows modest jobs growth, benign wage pressures and a large jump in the unemployment rate as the labour market slackens. With inflation set to continue slowing, the Fed is surely not hiking interest rates in September and is unlikely to do so in November either.
Neil Birrell, chief investment officer at Premier Miton Investors, highlighted the weakness of earnings growth, which came in at 0.2%, versus a 0.3% average prediction. Birrell said:
While the US payrolls number came in exactly as expected, the average earnings number came in below expectations and is currently at levels not seen since early last year. There is probably not too much to read into the data but it’s likely that markets will see this as a sign that peak rates will arrive sooner. The Fed will take heart and see this as a positive, although it’s what they say and do about it that really matters.
Every cloud has a silver lining, so they saying goes, and there was some cheerier news for Jeremy Hunt to offset today’s gloomy news on manufacturing and house prices.
Each year the number crunchers at the Office for National Statistics trawl through the data and revise the UK’s growth performance going back to 1997. This year’s big news is that the economy recovered a lot more quickly from the Covid-19 lockdowns than previously thought.
Up until now, the ONS had thought the level of gross domestic product (GDP) was 1.2%* below its pre-pandemic level by the end of 2021. Now it says it was 0.6% higher.
That doesn’t sound much but it meant that far from being the laggard of the G7, the UK’s recovery – up to that point – was the third fastest after the US and Canada.
*An error in the previous GDP figure has been corrected.
Updated
Hunt: GDP upgrade proves UK economy doubters wrong
Back on the UK for a moment, chancellor Jeremy Hunt is delighted with the upgrade to economic growth figures.
Hunt was not chancellor during 2020 or 2021, the years in question, but he said critics of UK economic policy were wrong.
The figures showed the UK had the third fastest recovery in the G7 at the end of 2021, behind only the US and Canada. The ONS data had previously showed the UK at the bottom of the pack of powerful economies.
Hunt said:
The fact that the UK recovered from the pandemic much faster than thought shows that once again those determined to talk down the British economy have been proved wrong.
There are many battles still to win, most of all against inflation so we can ease cost of living pressures on families. But if we stick to the plan we can look forward to healthy growth which according to the IMF will be faster than Germany, France, and Italy in the long term.
Traders are now pricing in only a 7% chance of a rate hike at this month’s Federal Reserve rate-setting meeting on 20 September, according to probabilities calculated from financial market trades.
Mohamed El-Erian, an economist who advises investor Allianz, said markets will react favourably to the jobs data – because it means the Fed is more likely to take its foot off the brake.
Taken at face value, the US August #jobs report increases the probability that the highly data-dependent Fed will not hike again in this cycle as
— Mohamed A. El-Erian (@elerianm) September 1, 2023
Job gains (including revisions) moderated (187,000 and -110,000);
The unemployment rate went up to 3.8%;
Labor force…
The US dollar has fallen to its lowest level today after the jobs data. Lower interest rates tend to make currencies less attractive to global investors.
Fewer rate hikes could also make bonds more attractive. US government Treasury bond yields fell back – bond yields move inversely to prices, so investors have snapped up bonds in the expectation of lower rates than before. The two-year Treasury bond yield fell by 0.08 percentage points after the jobs data.
US stock market futures were already suggesting Wall Street would open in positive territory, but they have gained sharply after the jobs data.
Higher unemployment is likely to give the Federal Reserve pause when it considers whether to raise interest rates further in September, as it could suggest that previous rate hikes are having an effect in cooling the economy.
US unemployment rate jumps unexpectedly to 3.8%
The US rate of unemployment rose unexpectedly in August to 3.8%, surprising economists who had predicted it would remain unchanged at 3.5%.
The US economy created 187,000 jobs in August, slightly beating expectations, according to the US Bureau of Labor Statistics.
Economists had on average expected 170,000 new jobs, according to a Reuters poll. Revisions to July’s data suggested only 157,000 jobs were created then, down from an original reading of 187,000.
Perhaps the key data release of the week, the US non-farm payrolls, is nearly upon us.
The data on how many jobs the US economy created is one of the key metrics that the Federal Reserve uses to measure the strength of growth, and therefore whether its monetary policy is having an effect.
Economists have on average predicted 170,000 new jobs were created in August, down from 187,000 in July.
Henk Potts, a market strategist at Barclays Private Bank, said:
The US labour market has remained in rude health this year. July’s unemployment rate eased to 3.5%, close to a multi-decade low. We expect Friday’s employment report to reflect a vibrant economy, with 200,000 more jobs created in August. Wage growth is expected to hold steady, with average hourly earnings increasing by 4.4% year-on-year. Additionally, the unemployment rate is expected to tick up to 3.6%.
Beyond the headline numbers, there are signs that demand for jobs is starting to soften. Vacancies decreased more than expected in July, falling to 8.8 million, compared to a post-pandemic peak of 12 million positions. As the US economy cools over the next twelve to eighteen months, we expect job creation to slow and the unemployment rate will likely creep up to around 4.5% by the end of next year.
UK economy recovered to pre-pandemic level in 2021 - earlier than thought
The UK economy recovered to pre-pandemic levels in the fourth quarter of 2021, earlier than previously thought, the Office for National Statistics (ONS) has said after significant revisions to GDP data.
The ONS has revised up GDP growth in 2021 by 0.9 percentage points to an 8.5% increase, after a fall of 5.8% (which was not revised) in 2020, in an update on Friday. It said:
Upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below.
The revisions – the results of changes to the way the statistics body measures economic output – are important because economists had puzzled over why the UK had seemed to be lagging behind other countries in its recovery.
You can see the effect of the change in this graph, with the lighter blue line just edging over the 100 mark that denotes output in the fourth quarter of 2019, the last before the pandemic:
Mike Ashley’s Frasers Group, the owner of Sports Direct, has continued building its stake in fast fashion retailer Asos.
The latest filing shows the holding is up to 19.82% – that is more than double the size of the stake in June, although it is still well short of the 30% level. At 30% ownership investors must make a mandatory bid for the whole company.
Asos’s London-listed shares are up 5% today – although they are still down by well over 90% from the coronavirus pandemic-era sales boom for online retailers.
Frasers has used the share price weakness to build up a stake. It has previously bought out I Saw it First and Missguided last year, and already other brands, including Jack Wills and Agent Provocateur, which it might like to push through Asos’s site.
Global interest rates will remain high for “quite some time” and may never return to “low for long”, according to the number two official at the International Monetary Fund (IMF).
Gita Gopinath, the IMF’s first deputy managing director, said that rates might never return to the era of “low for long” given the possibility of more frequent adverse supply shocks, according to Reuters.
She was speaking at a biennial conference of the South African Reserve Bank.
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, a consultancy, said that a brief upturn in manufacturing production in June was probably not a real positive: it may have come as a result of a extra working day after the King’s coronation in May.
There is not much positive for UK manufacturers.
She said:
The underlying picture in the manufacturing sector in August was very weak, with demand hampered by higher interest rates.
The new orders balance fell to 38.8 – also its lowest level since early 2009, excluding the pandemic – from 43.1 in July, while the export orders index fell to 38.6, from 41.4. Production fared little better; the output index fell to 44.1, from 47.2, and probably would have fallen further if it weren’t for temporary support from manufacturers working through the backlog of orders at the fastest pace since February 2009, with the exception of April 2020. The stock of uncompleted work will dry up soon.
Glynn Bellamy, UK head of industrial products for accountants KPMG, said:
Manufacturing is facing the perfect storm of softening underlying demand exacerbated by the continuing unwind of inventory levels built up to counter the supply chain disruption experienced post Covid-19.
John Glen, chief economist at the Chartered Institute of Procurement & Supply, which sponsors the UK survey, said there were “small crumbs of comfort” for manufacturers in that inflationary pressures appeared to be easing.
Cost increases slowed to the lowest since 2016 – but then again, prices are going to fall if nobody is making any orders.
It should be remembered that the UK’s manufacturing industry has long been in decline as a share of the economy: it hit 8% in 2022, according to the World Bank.
Nevertheless, Glen raised the “R” word: there will be “headaches for policy makers about what steps to take to keep the economy from sliding into recession”, he said.
It has been a shocking two years for Britain’s factories.
There was a big elastic band recovery following the depths of the pandemic lockdowns, but that surge in demand put global supply chains completely out of joint – with car factories in particular struggling to source computer chips.
The semiconductor chip shortage may be all but over, but now there is a cost of living crisis instead, and companies are preparing for a downturn.
The rate of contraction in the purchasing managers’ index accelerated to its steepest in a year and to one of the fastest in the survey history as orders dried up and companies cut jobs.
Rob Dobson, director at S&P Global Market Intelligence, said:
The PMI sank to a 39-month low as output and new orders contracted at rates rarely seen outside of major periods of economic stress such as the global financial crisis of 2008/09 and the pandemic lockdowns.
Manufacturers reported a weakening economic backdrop as demand is hit by rising interest rates, the cost-of-living crisis, export losses and concerns about the market outlook. While this is being felt across the manufacturing industry, business-to-business companies are especially hard hit. Intermediate goods producers saw the steepest drops in output, new orders and employment as a result.
UK manufacturing slumps to lowest since pandemic
The UK’s manufacturing sector has slumped to its slowest activity since the depths of the coronavirus pandemic lockdowns, according to the purchasing managers’ index (PMI).
Aside from the first lockdown in May 2020, it is the weakest the manufacturing sector has been since the financial crisis of 2008-9, according to the measure from S&P Global.
The index, which economists look to for a reading of where economic activity is going, fell to 43 points in August, down from 45.3 in July and well below the 50 mark that indicates expanding output. S&P Global said:
Manufacturers are reporting a weakening economic backdrop, as demand is hit by rising interest rates, the cost-of-living crisis, export losses and concerns about the market outlook.
Eurozone manufacturing sector dragged down by German weakness
The eurozone manufacturing sector was “under intense pressure” in August, with output still contracting and Germany in particular struggling, according to the closely followed purchasing managers’ index (PMI) survey.
The index rose slightly from 42.7 points in July to 43.5 in August, but remained far below the 50 mark that indicates the manufacturing sector is expanding, according to data company S&P Global.
Germany and Austria were the two worst-performing nations “by a considerable margin”, although rates of decline did ease slightly, S&P Global said. Germany’s reading was a painful 39.1.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which sponsors the survey, insisted the latest numbers “aren’t as terrible as they might look at first glance”, and said there were some indications that “the downward trend from the past few months is starting to lose steam across the board”.
He said:
The driver of the downturn has been the destocking cycle. There are tentative signs, however, that this process is nearing its end as companies took their foot off the gas when it came to reducing the stock of purchases in August.
De la Rubia said the German weakness would fuel criticisms of the country as the “sick man of Europe”. Germany has been hobbled by the Russian invasion of Ukraine, which prompted a scramble for alternative energy supplies, and it has already suffered one recession this year and may be on the way to another. He said:
Germany remains a negative outlier among the big euro countries. This will fuel the discussion about Germany being the sick man of Europe, even though the nation continues to be among the most diversified economies.
Direct Line Group has agreed to repay £30m to customers for home and motor insurance after the regulator found they had been overcharged.
The Financial Conduct Authority said Direct Line, a member of the FTSE 250, had “charged some existing home and motor customers more for their renewal than they would have done if they were a new customer”, breaking rules designed to stop companies from ripping off existing customers.
Direct Line said, in a statement to the stock market:
An error in our implementation of these rules has meant that our calculation of the equivalent new business price for some customers failed to comply with the regulation. As a result, those customers have paid a renewal price higher than they should have.
Rail strikes: no talks in sight as services stop across England
The group representing train operating companies has said that drivers’ union Aslef needs to accept changes to working practices before negotiations can restart, while the union says it will not negotiate on an offer that contravenes its “red lines”.
Robert Nisbet, director of regions and nations at the Rail Delivery Group (RDG), which represents train operators, told BBC Radio’s Today programme that Aslef must show “movement” on accepting changes to working practices before further negotiations.
The head of Aslef, Mick Whelan, on Friday said that the RDG and unions have not met since April, because there has been no compromise on the union’s “red lines”. He said:
Unfortunately we have to take this action. We don’t want to hurt the travelling public, but after four years and virtually, for some of my members, half a decade without a pay rise, we’ve got no choice.
Here is a list of the train operating companies affected by the rail strikes (spoiler alert: it’s almost all of them). The links take you through to the National Rail page with detail on services today and tomorrow:
Avanti West Coast; c2c; Chiltern Railways; CrossCountry (also affected by industrial action on Saturday 9 September); East Midlands Railway; Gatwick Express; Great Northern; Great Western Railway; Greater Anglia; Heathrow Express; Island Line (1 September only); London Northwestern Railway; LNER; Northern; South Western Railway; Southeastern; Southern; Stansted Express; Thameslink; TransPennine Express; Transport for Wales (not on strike, but service changes on some routes); West Midlands Railway
Chemicals company Johnson Matthey learned on Wednesday that it will drop out of the FTSE 100 index come 15 September. It may have avoided that fate had the quarterly index review waited a few days.
Johnson Matthey is the top riser on the blue-chip index today, up 13% after the investment arm of US conglomerate Standard Industries raised its stake to 10%. Standard first took an interest in Johnson Matthey in April 2022, prompting a big share price gain, and speculation that a takeover could be imminent.
Johnson Matthey is one of the UK’s most venerable industrial names, with a history that stretches back to the industrial revolution. Now it makes most of its sales from catalytic converters on petrol and diesel cars – a business that will inevitably decline as electric cars take over. It made an ill-fated foray into electric car batteries, but now it is pinning its hopes on technologies related to hydrogen.
Fashion retailer Superdry is having a tough time: it asked for its shares to be suspended on Wednesday because of problems with its audit. It has released delayed results today, and they show losses jumping to £148m for the year to 29 April.
That compared to £22m in losses in the year to April 2022. The loss was partly driven by impairments on the value of its stores, and accounting changes related to tax.
Blame it on the weatherman: it said its spring/summer ranges have been hit by “extreme weather events across the UK and Europe”, but it added that its autumn/winter clothes have been selling more earlier this year.
But either way, the company is battening down the hatches: it does not expect “significant revenue growth as we focus on cost savings and margin improvement”, with £35m in cuts coming through in the year to April 2024.
Julian Dunkerton, Superdry’s founder and owner of a fifth of the company, took back control of the firm in a boardroom coup in 2019. It has not been an easy time since then, with pandemic lockdowns now replaced by the cost of living crisis.
Dunkerton said:
This has been a difficult year for the business and the market conditions have been extremely challenging, especially in wholesale. We’ve looked closely at how we operate and have taken decisive actions to improve our position, rebuild liquidity, and recapitalise our balance sheet, through careful preservation of cash and a re-engineered cost base.
The good news is that despite the external turbulence, the brand is in sound health and has momentum. Stores and e-commerce delivered a strong sales performance, and I’m excited by our collections for the autumn/winter ‘23 season. While wholesale remains very challenging, I believe the new team in place will recover this business in the medium term.
Stock markets are up and running for the first day of autumn: the FTSE 100 has gained 0.2% in the early trades.
Here are the opening snaps from across Europe’s stock markets, via Reuters:
EUROPE’S STOXX 600 FLAT
FRANCE’S CAC 40 DOWN 0.2%, SPAIN’S IBEX UP 0.1%
EURO STOXX INDEX DOWN 0.1%; EURO ZONE BLUE CHIPS DOWN 0.1%
GERMANY’S DAX DOWN 0.1%
UK house prices fall by 5.3% annually
Good morning, and welcome to our live coverage of business, economics, and financial markets.
UK house prices fell by 5.3% from their peak in August 2022 to this year, the fastest decline since 2009 when the financial crisis caused the housing market to seize up, according to new data from Nationwide.
The annual fall in prices was significantly faster than the 3.9% that economists had expected, according to a poll by Reuters and beat last month’s 3.8% fall. Prices dropped 0.8% month-on-month in August.
It means the average UK home – which costs about £259,000 – is about £14,600 cheaper.
Even if the pace of the downturn in prices is unexpected, precisely nobody is surprised that prices are falling: inflation is eating into disposable income, and the Bank of England has raised the cost of borrowing dramatically in order to counter further inflationary pressures.
You can see the slowdown clearly here:
Andrew Wishart, senior property economist at Capital Economics, a consultancy, thinks there is more of this to come:
The large monthly fall in house prices in August confirmed that the further leg down in house prices that we have been forecasting has begun to materialise. With mortgage rates likely to remain around current levels for another 12 months, we expect prices to continue to fall until mid-2024, taking the total drop in house prices since their August 2022 peak from 5.3% now to 10.5%.
Robert Gardner, Nationwide’s chief economist, said the decline was “not surprising” given the rise in borrowing costs and the decline in mortgage approvals, but he is still hopeful that “a relatively soft landing is still achievable, providing broader economic conditions evolve in line with our (and most other forecasters’) expectations.” He said:
In particular, unemployment is expected to remain low (below 5%) and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.
While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks.
It is quiet on British railways this morning. Most rail services in England will not run on Friday due to the Aslef train drivers’ union strike, with a further day of severe disruption on Saturday when train staff in the RMT will walk out again, in the long-running dispute over jobs and pay.
Unions are also protesting over the closure of ticket offices, with a government consultation closing today. The unions argue the closures will negatively affect passengers, but some rail companies argue they will be able to move staff into other parts of stations.
The agenda
9am BST: Eurozone HCOB/S&P Global manufacturing purchasing managers’ index (August; previous: 43.7 points; consensus: 43.7)
9:30am BST: UK CIPS/S&P Global manufacturing purchasing managers’ index (August; prev.: 42.5; cons.: 42.5)
1:30pm BST: US non-farm payrolls (August; prev.: 187,000; cons.: 170,000)
